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The mighty U.S. Federal Reserve is an edifice built on a foundation of fallacy. The Fed’s policies and pronouncements, and even the law that it operates under, are based upon the “Phillips Curve,” the fantasy that we can trade higher inflation for lower unemployment.

Monetary inflation is a decline in the real value of the currency unit, which, for the U.S., is the dollar. The best most sensitive and reliable measure of the real value of the dollar is how many ounces of gold it will buy. This is because gold has maintained a reasonably constant real value over the centuries, and because gold is considered by many to be the ultimate and true “money.”

Accordingly, we can divide America’s post-war economic history into four periods, based upon the trend in the gold value of the dollar during each period. We’ll start with 1951, because this is the first year for which detailed Bureau of Economic Analysis (BEA) fixed asset data is available.

Below is the key data for the four major post-war periods:

The facts notwithstanding, the Phillips Curve superstition persists. While the Phillips Curve has a certain surface plausibility, the main reason that the Phillips Curve hangs around is because it serves powerful interests, including those of the Federal Reserve itself.

First, let’s take a look at history.

In 1958, an English economist named A.W. Phillips published a paper that showed that, during a 100-year period ending in the 1950s, wages tended to rise when unemployment was low, and fall when unemployment was high. Basically, Phillips discovered that the law of supply and demand applies to labor. Well, duh.

Keynesians seized upon Phillips’ research, substituted “monetary inflation” for “rising wages,” conveniently forgot that England had been on a gold standard during most of the period that Phillips had studied, and deftly reversed cause and effect. Voilà, the Phillips Curve, which postulates that we can reduce unemployment if we are willing to endure higher inflation.

Maybe they should, but they don’t. The very first thing that monetary inflation does is to increase commodity prices, and commodities are the raw materials used in the production of GDP. The higher real raw materials prices seem to more than offset any inflation-induced reduction in real wages.

Here is the data for the CRB Index, which encompasses 19 broadly traded commodities, adjusted for the GDP deflator:

Clearly, when the dollar is stable, real commodity prices tend to decline. This frees up money to pay higher real wages. Because consumer prices for food and fuel track the CRB index, lower commodity prices also take pressure off family budgets.

So, we have hard evidence that the Phillips Curve theory doesn’t work, and a plausible explanation for why it doesn’t work. Why, then, does the Fed cling to the Phillips Curve?